The airline industry is facing one of its most challenging environments in history. A global economic recession coupled with the terrorist attacks of September 11, 2001 have led to a decrease in passenger traffic, reduction in revenue per mile flown, and rising labor costs. Additionally, a collapse in pricing power and a shift in the buying behavior of business travelers, coupled with fierce competition from low cost airlines, are forcing major airlines to restructure their operations or face the prospect of going out of business. The airline industry has responded to this difficult environment by taking measures to reduce their costs. Airlines announced layoffs involving more than 100,000 employees immediately following the attacks. To make matters worse for the industry, the Federal Aviation Administration (FAA) predicts only a gradual recovery in passenger traffic during the coming years.

Environment

The U.S. airline industry went through a deregulation process in 1977. Prior to deregulation, 34% of all passengers did not have a choice of selecting an airline and domestic carriers transported 240 million passengers annually (TIA.org website). After deregulation, 85% of all passengers in the U.S. had a choice of two or more carriers and traffic increased to 640 million passengers annually (TIA.org website). The growth in the number of passengers flying can be attributed to increased competition, innovations in marketing & operations resulting in lower cost of flying, introduction of new services and improvements in service quality. The industry became a perfect competition marketplace in that no single firm can influence the price of the product, consumers (for the most part) view the products of all firms as perfect substitutes and consumers will purchase a product from the firm with the lowest price.

In late 1990s, during the technology bubble and the increased globalization of business, the airline industry grew at a rapid pace. However, the industry has suffered quite a few setbacks after experiencing that boom. Pummeled by poor profits and scarred from a terrorist attack against the United States, the airline industry finds itself on an uncertain course. Below are travel expenditures (in $billions) for the U.S. airline industry from 2000 through 2004 secured from the plunketresearch.com website.

Year Total Travel Expenditures in US$billions

2000 563.6

2001 527.3

2002 529.2

2003estimate 555.6

2004forecast 583.6

In an already intensely competitive market, the inevitable industry-wide shakedown is having far-reaching effects on the industry's trend towards expanding domestic and international services. Many international airlines are still partly owned by their respective nations, and treaties between nations determine which airlines can land where. In 1992, the United States, as part of the continuing deregulation of its airline industry, began signing "open skies" treaties with other countries, which eliminate restrictions on routes and fairs. The United States currently has fifty-nine open skies treaties, including eleven with European Union countries. The United States is presently negotiating with the European Union (15 members in total) on a single aviation agreement with all participating nations that would allow any US or EU airline to fly to any point on either side of the Atlantic, without needing permission on routes, fares or frequency of flights (Michaels, 2003, p.A3). The accord could result in lower fares through increased competition as airlines find it easier to enter each other's market. However, some believe that fares may also rise, as any open skies treaty would yield massive consolidation among European airlines and lower the number of competitors in the marketplace (Michaels, 2003, p.A3).

To get around national laws and regulatory problems, airlines have formed global alliances such as Star (United Airlines and Lufthansa), Oneworld (American Airlines, British Airways, etc.), and SkyTeam (Delta Air Lines, Air France, and AeroMexico). Through such alliances, airlines benefit from each other's resources, which include additional routes and marketing strategies as well as code-sharing agreements, without incurring the high costs of expansion. The costs involved with increased security precautions and route changes will force the airlines to examine their agreements and consider expansions of the same. For customers, airline alliances offer broader frequent flier programs, streamlined travel, and simplified systems for purchasing tickets, but those benefits may do little to allay passenger concerns regarding safety.

Advances in communication technology have also played a role in the airline industry's recent troubles. Advances such as video conferencing, internet chat and internet telephones allow firms to conduct business without having their executives get on the